Written by Lance Roberts, Clarity Financial
Data Analysis Of The Market and Sectors For Traders
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S&P 500 Tear Sheet
Performance Analysis
ETF Model Relative Performance Analysis
Sector & Market Analysis:
As I noted, the S&P 500 sectors have been shuffled up a bit. As such, I have changed the two charts below. The S&P analysis now includes both XLC and XLRE. I have also added the S&P 500 index just for comparative purposes.
Since real estate was moved up from the major markets graph, I have added a pure S&P 500 index for comparative performance to the equal weight and dividend weighted indices.
Sector-by-Sector
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Discretionary, Healthcare, and Technology primarily drove the overall market advance last week, what little bit there was to speak of. Healthcare’s recent run continues but is grossly extended. Not surprisingly, these are the three sectors with the highest momentum and trend rating as shown above.
Industrials and Materials lost their recent “mojo” last week as rising “tariff” risks overrode the recent sector rotation to under-performing sectors. Take profits in Industrials for now. With 8 of 10 trend and momentum indicators still positive for the Industrial sector, use pullbacks to support and short-term oversold conditions to add positions to portfolios. Basic Materials, is a disaster. Just avoid for now with only 1 of 10 trend and momentum indicators currently in play.
Utilities and Real Estate – Both suffered corrections last week as rates pushed higher. Unfortunately, both sectors, while now short-term oversold, violated their 50-dma. Take profits in both sectors following the recent run and watch to see if both sectors fail to get back above their respective 50-dmas. Failure will likely suggest a short-term top with lower lows to come before the next decent trading opportunity presents itself. With only 4 of 10 trend and momentum indicators in place, the sectors are too weak to establish positions in currently.
Energy – The uptick in oil prices over the last couple of weeks brought money flows back into the Energy sector which rallied to the top of its downtrend and failed. With only 5 of 10 trend and momentum indicators positive currently, take profits in the recent run and look for a pullback to the 50-dma which holds to add exposure if needed. Stops should remain at the 200-dma.
Financials continue to languish and after a brief spurt completely fell apart violating both the 50 and 200-dma. Look for a failed rally back to the 200-dma to reduce exposure to the sector. With only 1 of 10 trend and momentum indicators in place the sector should remain underweight in portfolios with stops moved up to last weeks lows.
Staples have performed well from the recent lows which is why 6 of 10 indicators are currently positive. The recent pullback to the 50-dma provides a reasonable entry point on a risk/reward basis if you need to increase exposure to sector. Keep a tight stop at the 50-dma.
Telecommunications – with the new reshuffle in this sector could well see a pick up in volatility. There is no reason to add this sector to holdings right now as there simply isn’t enough data yet to determine much of anything from a trading perspective. We will watch this over the next couple of months to see how things develop.
Small-Cap and Mid Cap we noted four weeks ago that these markets were extremely overbought and extended, and a pullback to support was needed. The advice to take profits in these sectors was prescient with both sectors violating their respective 50-dma’s in the recent sell-off. With 6 of 10 trend and momentum indicators still intact we will continue to remain long the sectors but stops have been moved up. Small-caps are oversold which tends to provide a good trading opportunity. Mid-caps are not there just yet.
Emerging and International Markets as I noted last week.
“Both sectors rallied a bit last week, providing an opportunity to reduce exposure for the time being and reallocate that capital to better performing areas. WHEN international and emerging markets begin to perform more positively we will add positions back to portfolios. There is just no reason to do so now.”
That advice remains the same this week. With 0 and 1 trend and momentum indicators in place, there is no reason to be long these sectors just yet. If we start to see real improvement, versus a bounce in a downtrend, we will reconsider our weightings.
Dividends, Market, and Equal Weight – we added a pure S&P 500 index fund to our “core” holdings which will add some beta to the portfolio but acts as a placeholder for sectors and markets we have no allocation to (ie, international markets, gold, basic materials.) We continue to hold our allocations to these “core holdings” and continue to build around these core with tactical positions that provided opportunistic advantages.
Gold – failed, again, at the 50-dma this past week. This was your opportunity to sell your holdings for the time being. Stops remain firm at $111 again this week which looks like they may well be triggered next week. Gold currently has 0 of 10 trend and momentum indicators in place.
Bonds – As I noted last week,
“Bonds sold off on the spurt in interest rates back above 3%. With bonds back on strong support at recent lows, and very oversold, we are looking to add bond exposure to our portfolios. We are moving our stop to $114 for trading positions.”
Bonds bounced off support last week as the market began to struggle. Keep stops tight on trading positions but remain long individual bonds in portfolios.
The table below shows thoughts on specific actions related to the current market environment.
(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)
Portfolio/Client Update:
As noted, three weeks ago, with the market holding support above the “breakout” levels from January, we added exposure to portfolios. With the pullback to support this past week we will wait to see if these levels hold.
We are watching the rotation between sectors and markets closely to see if market performance will regain some strength and begin to firm for an expected year-end rally.
Currently, with portfolios fully allocated there is little to do this next week. However, we will be monitoring things closely.
- New clients: Need a pullback to support that holds to on-board new positions. 1/2 model weights.
- Equity Model: Semiconductors (MU & KLAC) remain on “Sell Alerts” – we are monitoring these positions closely and stop-loss levels have been tightened up. We have also tightened up stops on other positions as well including (SU) which has not performed as expected.
- Equity/ETF blended – Same as with the equity model.
- ETF Model: We overweighted the core “domestic” indices by adding a pure S&P 500 index ETF to offset lack of international exposure. We remain overweight outperforming sectors to offset underweights in under-performing sectors.
- Option-Wrapped Equity Model – We added PEP and JNJ to the portfolio and brought existing positions up to full-weights as needed.
There were no changes last week as the bulk of our positions are currently working as expected. However, as we have repeatedly stated, we are well aware of the present risk. As noted, stop loss levels have been moved up to recent lows and we continue to monitor developments on a daily basis. With the trend of the market positive, we want to continue to participate to book in performance now for a “rainy day” later.
It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging, if the market environment changes for the worse.
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